Kerri, Author at This Way Out Group - Page 13 of 25
In our experience, your age has a big effect on your attitude towards your business and how you feel about one day getting out. Here’s what we have found:
Business owners between 25 and 46 years old
Twenty- and thirty-something business owners grew up in an age where job security did not exist. They watched as their parents got downsized or packaged off into early retirement, and that caused a somewhat jaded attitude towards the role of a business in society. Business owners in their 20’s and 30’s generally see their companies as means to an end and most expect to sell in the next five to ten years. Similar to their employed classmates who have a new job every three to five years; business owners in this age group often expect to start a few companies in their lifetime.
Business owners between 47 and 65 years old
Baby Boomers came of age in a time where the social contract between company and employee was sacrosanct. An employee agreed to be loyal to the company, and in return, the company agreed to provide a decent living and a pension for a few golden years.
Many of the business owners we speak with in this generation think of their company as more than a profit center. They see their business as part of a community and, by extension, themselves as a community leader. To many boomers, the idea of selling their company feels like selling out their employees and their community, which is why so many CEO’s in their fifties and sixties are torn. They know they need to sell to fund their retirement, but they agonize over where that will leave their loyal employees.
Business owners who are 65+
Older business owners grew up in a time when hobbies were impractical or discouraged. You went to work while your wife tended to the kids (today, more than half of businesses are started by women, but those were different times), you ate dinner, you watched the news and you went to bed.
With few hobbies and nothing other than work to define them, business owners in their late sixties, seventies and eighties feel lost without their business, which is why so many refuse to sell or experience depression after they do.
Of course, there will always be exceptions to general rules of thumb but we have found that – more than your industry, nationality, marital status or educational background – your birth certificate defines your exit plan.
Ideally, exit planning occurs before action in every area.
Too often business owners/CEOs assume that because they want to exit the business soon, that they just have to act to make it happen. In fact, they are often surprised by how extensive the planning is that they must work through before they can get out and transition to reinvention.
Exit planning must include each parameter on this list.
Exit Objectives – Before you proceed, you must identify your exit objectives for the business and for your life beyond the exit.
Value Drivers – You must identify your value drivers, the value drivers that will make the business buyer attractive and the value drivers that secure the future growth of the business and protect your employees.
Transfer Control/Ownership/Management – Control, ownership and management are not the same thing. So planning how to transfer these different skill sets to successors is essential. You need to break them into distinct skill sets before you decide who you will train to succeed you in each area.
Contingency Planning – When things are running smoothly, owners think contingency planning is irrelevant. But if illness or an accident incapacitates you, your valuation will plummet unless you have a contingency plan/continuity plan established, documented and ready to activate.
Wealth Management/Preservation – You have to decide how much of the illiquid wealth of your business you want to leave in the business, to maximize valuation and secure future company success vs. how much do you need to liquidate to achieve your exit criteria and the financial freedom to pursue your reinvention.
Successful Exit – Defining and planning what a successful exit means to you is important. There is no vanilla answer. It’s unique to you, your family, your goals, your business, the lifestyle of your dreams. If you can’t describe it, you will never know when the package on the table meets your needs.
Exit Options – The earlier you start exit planning, the more options you have, the wider range of exit vehicles, wealth vehicles and reinvention options you can have.
You can exit your business on your terms so you can transition to the lifestyle of your dreams with the wealth to pursue your reinvention (venture, adventure, avocation, hobby, retirement)
But what you can’t do is assume you can simply hire a team of experts and just walk away from your business in the next six months.
Start with your exit criteria to achieve your ultimate goals as you transition to your reinvention.
• Freedom — What does freedom look like to you when you exit your business, after the exit transaction is complete?
• Control — Who’s in control of decisions, strategy, budget, operations, and sales now? Who will be in control of each area of the business when you exit? Have you transitioned the decisions and control to one person, to a team of leaders or to no one leaving a vacuum in the business?
• Wealth — What is your wealth requirement for your reinvention and lifestyle after you exit? How do you define wealth? How much of the wealth you need for your reinvention must come from the business? Can you liquidate the business to produce that level of wealth to achieve your other exit criteria?
• Liquidity — How much liquidity do you need immediately when you exit? How long can you wait to receive final payment?
• Timeline — What is your ideal timeline for your exit? For your reinvention? For liquidity?
• Legacy — What’s your definition of the legacy you want to leave behind? What do you and your business stand for? What do you want to be remembered for? How can you achieve that?
• Dynasty — Do you want to build a family dynasty? What would that look like? What do you have to put in place to realize your dynasty?
If exiting your business does not need to lead to retirement and death, what’s next? It’s your choice, both because you’re the exiting owner and because your opportunity is not your parents’ retirement expectations.
What’s next can and should be your reinvention.
Our parents worked 9-5 jobs for large companies with a pension and retirement benefits built into their compensation package. They were loyal to the company for 20, 30 or more years and were rewarded with a secure pension to rest and relax for the rest of their lives.
That model has all but been wiped out. In its place every working individual has to plan, save, and invest over a lifetime of jobs, career moves and other changes to create the wealth to provide financial independence. As the owner of your business, you have been working long hours for many years to build the business to provide an income, while benefiting from and enjoying some tax-advantaged benefits of ownership (e.g., company paid and/or tax deductible health insurance, use of a company car, paid vacations, etc).
When you sell or pass on your business, many of those benefits become expenses instead of deductions if you want to maintain the same lifestyle.
Your reinvention in the 21st century will look very different from your parents’ retirement. Some general observations:
1. The actuarial tables for the second half of the 20th century forecast life expectancy to be retirement + 3 years.
2. Our parents left a job or career to go home and read, knit, cook, play golf or play with the grandchildren.
3. There was no expectation they would pursue gainful employment, start new businesses, or make major contributions as ‘old, retired’ people.
4. They were sidelined by society.
None of that is true for today’s BabyBoomer business owners, the primary audience for this book. As BabyBoomers, we:
1. Expect to live decades into the retirement years
2. Have the health, vitality, wisdom and creativity to reinvent ourselves, our lives and start over if we want to
3. Have no intention of retiring by any definition
4. Have more plans for the next three, four or more decades of our lives
5. Have the wealth, financial independence and education to expand our options and choices in reinvention.
6. Are choosing and planning our reinvention to be some combination of:
a. a new venture – for profit or not, a spinoff of the business just sold, or something entirely new – whether the liquidity from the exit transaction will be used to fund it or not
b. an adventure – whether that means moving to the coast, to the mountains, to a resort community, to a 55+ community, or moving to Panama, Belize or Singapore, or sailing around the world for a year
c. an avocation – a cause or organization to contribute more time and resources to
d. a hobby – whether it’s learning golf, a musical instrument, or a new language or spending more time on an activity you love like horseback riding, scuba diving, sailing or skiing.
You must plan your transition to reinvention in the same systematic way you approach the sale of your business. One is closing out a chapter of your life. The other is setting up, structuring and preparing for the next chapter of your life. It is essential that these two projects progress in tandem to achieve a smooth handoff from one to the other when you exit your business.
Before you can implement your transition to reinvention, you have to plan it starting with some quiet time to reflect on you, your life purpose, and your outstanding Bucket List of goals, dreams, and adventures; the accomplishments you wish to pursue or complete beyond your business. Journal about the following “Seven Keys to Success,” in terms of the quality and richness of your life that you want to build after you exit your business. This should become an ongoing exercise early in your business right through the exit transaction and transition to your reinvention.
1. Awareness: It’s important to know who you are, how you got here, and what kind of decisions you’re making. We all get programmed as kids, but that doesn’t mean we have to live our whole lives with that programming.
2. Vision: Imagine the details of the life you want to live. We each make our own roadmap – consciously or unconsciously – and having a vision lets us know where we are going.
3. Purpose: Understand why you want to get to the destination. There’s more to life than hard work and grubbing after money. Finding purpose in everything you do puts a fulfilling life within your grasp.
4. Belief: We all believe in ourselves to some extent. Increasing that personal belief – your confidence – is a major component for being able to move forward.
5. Action: There are different types of action we take based on our awareness, vision, purpose, and belief. The momentum we build with our actions serves to propel our growth and development.
6. Gratitude: This is a deep and personal thing. I’m thankful every day for Uncle Tony and my dad. Being able to have gratitude for what we have in life – no matter where we’re at – is the hallmark of success.
7. Forgiveness: This is the hidden key to achieving and keeping success. Setting aside “what has happened” in favor of “what can be” means you’ll have your hands free to hold your success when it comes.
Entrepreneurs in the US for the most part are stuck. They are working hard long hours to create an income stream. If they stop working, there’s no income.
The fallacy is that there is no exit, and never will be, if you only focus on generating an income stream to pay your salary or to meet payroll. Without a wealth plan in place, a wealth plan established from profits, then retirement might as well be death because those same hardworking CEOs have no assets to walk away with, no assets to invest for their future.
When I talk to some CEOs and the subject of retirement comes up – you would think I was talking about their mortality. They equate any form of leaving the business as death. They live for the business. They have become so immersed in the business; they’ve lost sight of the purpose of commercial enterprise, their commercial enterprise.
The purpose of all commerce is to make a profit. When a CEO can turn a profit and exit on their terms and timeline, that’s a successful exit.
My assumption is that every CEO wants to liquidate their position in the company they built/own at some point, whether to fund their next step, even if it’s not a classic retirement; secure the future for their family and loved ones; or fulfill the terms of a will or trust. Even those CEOs who resist planning their exit, often procrastinate because they don’t know what to do or how to do it. No one intends to leave their business feet first without a plan for its continued success; but in epidemic proportions, they just don’t initiate and implement a timely exit plan.
When a CEO can walk away from the business with liquidity to fund their reinvention on their terms, instead of a rocking chair, knitting needles or fishing pole, that’s not retirement or death. That’s freedom and financial independence. You can too.
Before you can implement that transition to reinvention, you have to plan it starting with some quiet time to reflect on you, your life purpose and your outstanding Bucket List of goals, dreams, and adventures, accomplishments you wish to pursue or complete beyond your business. Journal about these seven keys to success, in terms of the quality and richness of your life that you want to build after you exit your business.
The other day I heard about a successful CEO in his fifties who runs a heating and air conditioning company generating eight million dollars in revenue and over one million dollars in profit before tax.
Even though he was tired and nearing burnout, he was planning to wait another five to seven years before selling his business because he “wanted to sell at the peak of the next economic cycle.”
On the surface, his rationale seems to make sense. If you speak with mergers and acquisitions professionals, they’ll tell you that an economic cycle can impact valuations by up to “two turns,” which means that a business selling for five times earnings at the peak of an economic cycle may go for as low as three times earnings at a low point in the economy.
The problem is, when you sell your business, you have to do something with the money you receive, which usually means buying into another asset class that is being affected by the same economy.
Let’s say, for example, you had a business generating $100,000 in pre-tax profit in an industry that trades between three times earnings and five times earnings, depending on the point in the economic cycle.
Furthermore, let’s imagine you sat stealthy on the sideline until the economy reached the absolute peak and sold your business for $500,000 (five times your pre-tax profit) in October 2007. You took your $500,000 and bought into a Dow Jones index fund when it was trading above 14,000. Eighteen months later – after the Dow Jones had dropped to 6,547.05– you’d be left with less than half of your money.
Even though you cleverly waited till the economic peak, by March 9, 2009, you would have effectively sold your business for less than 2.5 times earnings.
The inverse is also true. Let’s say you waited “too long” and sold the same business in March 2009. And because you were at the lowest possible point in the economic cycle, you only got three times earnings: $300,000. Notice that’s 20% more than if you’d sold at the peak and bought an index fund at the top of the market.
Just like when you sell your house in a good real estate market, unless you’re downsizing, you usually buy into an equally frothy market. Which is why timing the sale of your business on external economic cycles is usually a waste of energy.
External vs. internal economic cycles
Instead, I’d recommend timing the sale of your business when internal economic factors are all pointing in the right direction: employees are happy, revenue and profits are on an upward trend, and there is still lots of market share for an acquirer to capture.
When internal economic factors are pointing up, you’ll fetch a price at the top end of what the market is paying for businesses like yours right now, which means that – for good or bad – you get to use your newfound cash and buy into the same economic market you’re selling out of.
It’s good advice to appoint key advisors in the sale process as soon as possible to reduce costs and get ahead of the sale. However, it is also imperative for you, the business owner, to do your part long before you bring transaction experts to the table.
Develop and discuss with all your advisors, a recap of what business you are in and your reasons for selling. It is your business and you know it better than anyone else. It’s up to you to communicate your goals for the business, your team and your objectives getting out.
a. Initiate due diligence proactively. It shows potential buyers you’re serious and committed to the sale. It also will identify area, concerns, risks that can reduce your potential sale price. For example, unpaid taxes, incomplete financials, employee contract terms.
b. Define your ultimate exit strategy, which can also uncover potential opportunities to increase or decrease the value of undocumented and unregistered intellectual property.
The bottom line is that your business needs to be prepared for the sale or other exit options at all times, which involves organizing all aspects of the business to be appealing to a buyer.
You must put yourself in your potential buyer’s shoes to take a critical look at your own business. If not, you risk not achieving your best outcome, leaving money on the table.
Taking time to understand the drivers inherent in a potential buyer’s business can help you position your business to be buyer attractive and achieve a better sale outcome.
Valuation is the final exam giving you third party feedback/validation on what your business is worth in the market for your ideal buyer. Valuation is a measure of everything you do to accelerate growth, structure the company for growth/continuity/acquisition. That valuation number tells you if you can sell your business for what you want out of the business, if you have already hit your number, or if you need to grow it more to be able to exit on your terms. There are many ways the business can be valued by a prospective buyer. You need to know and prepare for the valuation exercise your ideal buyer may choose.
Here are some basic methods used to calculate valuation. There are always variations.
1. Simple Multiplier or Market Valuation
This method uses ‘industry average’ sales figure as the base for your multiple calculation. Variations of this could be average monthly gross sales, or gross sales plus inventory on hand, or net profits of comparable businesses in your industry in your region.
The catch is to find data to compare your business to. Location, outside economic factors, company size in revenue or staff or number of products, even target market niche can all add or detract from that multiplier when comparing your business to your competitors.
2. Asset Valuation
The value of your business is more than what’s reported on your balance sheet or in your checkbook. Asset valuation is a good fit for asset intensive retail or manufacturing businesses. You will monetize equipment, inventory at every stage, and facilities as the primary value in the business.
3. Capitalized Earnings
This is the concept of valuing a business by determining its net present value (npv) of expected future profits. In an economic sense, a company is worth the discounted amount of its net income. You can do the same thing for a specific asset (e.g., equipment), which should theoretically be worth the present value of future earnings that can be derived from it.
This valuation method is especially appropriate for service companies and non-asset based businesses.
The capitalization rate you use will be an estimate of the buyers risk level when investing in your business as compared with their other investment options. The capitalization rate used will be based on a variety of factors, such as:
• How long the business has been established,
• How long you’ve been the owner,
• Your reasons for selling,
• Identified risk factors,
• Current profitability,
• How much competition you have,
• How easy or difficult is it for you to exit vs.
How easy or difficult is it for others to enter your market,
• Industry forecasts,
• Technology you use to add value in the market,
• Team contracts,
• Client contracts.
The list of variables will be as long and specific as needed for your unique business.
There is goodwill in every business. Goodwill consists of those intangible assets, which are identifiable non-monetary assets that cannot be seen, touched or physically measured, that are identifiable as separate assets. There are two primary forms of intangibles:
Legal intangibles such as trade secrets (e.g., customer lists), copyrights, patents, and trademarks. Intellectual property is now often worth more than all the physical assets of the company.
Competitive intangibles such as knowledge activities (your expertise, knowledge, experience), your collaboration activities (your team and communication), leverage activities (in your business, in your market, in your industry), and structural activities (systems, processes, structure, procedures).
5. Return on Investment
Return on investment (ROI) is the most common and familiar form of business valuation. ROI is the amount of money the buyer will be able to realize from the continuing performance of the business after the sale. In this case, the focus is on the percentage the buyer will receive annually on the cash investment made to acquire the business.
Be familiar with each one and how it applies to your business and your exit goals. You need to recognize where you have leverage in negotiation by being able to demonstrate and showcase strengths and assets of your business the buyer will want to pay for.
It may seem that I’m beating a dead horse here. The reason I’m putting so much emphasis on tracking and measuring is that so many business owners ‘never get around to it’ and wonder why they are floundering and don’t know what’s working and what’s not working in their business. Without data, you can’t make the best decisions.
The more you refine your systems, processes and procedures to improve results, tracking and measuring help you to:
- Take away stress
- Sleep at night
- Reduce mistakes
- Make better decisions easier
- Outsource/delegate any task in your business faster & cheaper when you set up systems to track and measure
- Increase efficiencies
- Get more done
- Move more off your plate
- Get more time to plan and lead